Kominicki: At least there’s double-digit inflation to look forward to

Congressman Steve Israel called in Long Island’s keenest minds for a pickup economic summit in Washington last week. I was inadvertently invited.

It was chilly and rainy in our nation’s capital, a day warmed only by the fist-shaking and finger-pointing of the AIG bonus mess.

Under normal circumstances, money of this size wouldn’t represent much of a distraction. The $165 million in question is barely Metro fare for Washington, a tiny 1/100,000th of the U.S. economy, and isn’t it the economy, stupid, that should have everyone’s attention right now?

But Congress rarely gets a populist moment this sweet, so perfect an opportunity to swagger down Main Street, the new sheriff sent in to clean up eight years of salooning. And thus we keen minds waited while Steve and his colleagues passed a bill that will tax the bejesus out of bonuses earned by anyone with the misfortune of working at a firm that receives federal bailout money.

But time well spent, as it turns out, with summit warm-up act Robert Shapiro, a plain-talking, hand-in-the-pocket economist, despite a Harvard pedigree and polish from the London School of Economics. Now the head of a thriving eco-consulting shop, Shapiro was chief economic adviser on the Bill Clinton presidential campaign and has provided similar counsel to hopefuls Gore, Kerry and Obama. He continues to advise the new president on the point of theory at which politics and economics converge.

The overview: We are in an economic downturn whose seriousness has not been seen in most of our lifetimes, one that can deservedly be dubbed The Great Recession. Although it is global in scope, America is walking point, with Asia and Europe several months behind us but coming on fast.

Our country is experiencing the sharpest climb in unemployment since the end of World War II, when millions of servicemen were mustered out into the economy. The nation has lost as much as 25 percent of its wealth. GDP could decline by as much as 3 percent during this downturn, the largest dip in our history and one that will take years to replace. It has the potential to get worse.

The traditional cures for a recession won’t work here. Because of the problem’s global reach, we cannot count on exports to replace declining U.S. consumption. Thanks to the banking meltdown and the credit crunch, domestic business expansion is a distant hope. That leaves government, which has already pumped in $3 trillion, with limited results.

So look for Congress to pass a second stimulus package this summer, likely a mix of direct aid to the states and additional support for unemployment benefits.

“We’re throwing everything we have at this, hoping something sticks, because we have never seen this before,” Shapiro told us.

Socialism! Unconscionable government intervention! A rocket ride down the slippery slope!

Well, yes. But even with massive government stimulus, it could be two years before the economy stabilizes and growth returns. Even then, there will be continued shocks from overseas as the weakest foreign economies default on their debt. Austria and Italy are in especially bad shape now. Parts of Eastern Europe, Ukraine and Malaysia are other trouble spots to watch.

Declining trade will result in protectionism in some quarters. Then, four or five years down the road, expect Carter-like inflation as the final result of all the government stimulus. In other words, just when your net worth begins to rebound, it will get hammered again.

I begged Shapiro for a little good news for the free marketeers in the room, but he had none. There have been five economic meltdowns around the world in the past 25 years, he noted, and they led to recessions of as long as three years and GDP decline of as much as 5 percent.

“And that was with government intervention,” he told me. “Doing nothing is Christian Science economics.”

He paints a similarly grim picture of the future for conservatives, and predicts a lengthy run for the Democrats, whose ranks have been bolstered by immigrants and a Millennial Generation repelled by the social fundamentalism of the GOP. There is also, enough said, the Bush record.

Shapiro drove a final stake into the hearts of Republicans in the room with this: We are entering an era of higher taxes, a time in which the better off will be expected to pay a higher share than those with less. Take it and like it.

The, um, good news: If President Obama manages to save the economy, he will get everything he wants in social spending, including universal health care, a big boost to education and government support for new energy programs.

2 comments

Great summary, John. It reads like an Editor’s
consolidation of 40 articles that I’ve seen recently.
Unfortunately,they all conclude that we will be
experiencing a rough and uncertain economic ride.
We’ll just all have to buckle up, do what we can,
and pray that our government officials get it right.
— David Pinkowitz (www.dcpmarketing.com)